by John Fitzpatrick

The weakening US dollar has forced the Central Bank to rethink its policies in relation to intervening on the currency market, in order to help Brazilian exporters. By doing so, the Central Bank is taking a risk. However, at least it is doing something for the exporters unlike President Luiz Inacio Lula da Silva who has made important trade concessions to the visiting Russian and Chinese presidents and got little in return.

Brazilians must sometimes think they can never win when it comes to the exchange rate. In January 1999, as the Plano Real began to come undone, they saw the Real devalued substantially after it was floated. In the run-up to the last presidential election, they saw it plunge once again as nervous foreign investors anticipated the arrival of Luiz Inacio Lula da Silva. In both cases, the worst case scenario did not come about and the Real settled at a level which was good for the country´s exporters, and has led to the healthy trade surpluses. However, Brazilians are now seeing their currency rise against the weakening US dollar. This appreciation is being seen as a threat to the export boom and the government regards it as bad news. Importers and Brazilian tourists going abroad do not think it is bad news and neither do the speculators and hedge providers, who will do very well out of it.

Brazil is not the only country which is suffering from the weaker dollar and the Bush administration is coming under pressure from heavyweights like the European Central Bank to take action, since the higher Euro is also causing problems. So, for once, Brazil is not alone. However, since the US has shown no sign of intervening and Brazil has no influence in Washington these days, thanks to Bush´s indifference towards Latin America and President Luiz Inacio Lula da Silva´s hostility to the US, Brazilians will have to cope this themselves.    

This is being done by what looks suspiciously like Central Bank intervention. On Wednesday, November 24, the Central Bank announced that the Treasury would buy almost US$3 billion on the market over the next six or so months to pay off upcoming debts. However, the move was seen differently by many observers who regarded it as a bid to keep the Real from appreciating too much against the American currency. It also came shortly after Lula told the Bloomberg new agency that he wanted to see the Real trading at between R$2.90 to R$3.10. In recent weeks it has been trading at well below R$2.80.

The decision by the Central Bank to let the Treasury start buying dollars is a reversal of the government´s policy of letting the Real float freely on the currency market. The initial response to the intervention was a fall in the value of the Real by 0.40% but the effect was temporary. At the time of writing (November 26) the rate is R$2.73, with the futures market projecting a further fall in the dollar. The Real gained almost 2% over the week as a whole.  

Obviously the Central Bank felt it had to take action but now that it has done so it may find itself committed to a battle which will prove expensive. Undermining your own currency to support a foreign currency, even if it is the dollar, is a two-edged sword. It may also interfere with the tight monetary policy the Central Bank has imposed in order to meet the government´s inflationary target. The Central Bank recently raised the base rate, known as the Selic, by 0.5% to 17.25% and is expected to make a further increase at the December meeting of its monetary policy committee, the Copom. Meeting the inflation target – set at 5.1% next year – will be a hard job and the Central Bank will be criticized regardless of what it does. Opening a new front and trying to contain the appreciation of the Real will make this job much, much harder. Unless there are some moves in Washington it looks as though Brazil might face tough times ahead.

The government´s vulnerability was further seen when Russian President Vladimir Putin paid a flying visit during which he won Brazilian support for Russia´s entry to the World Trade Organization. However, he did not lift a ban on imports of Brazilian beef imposed in September following an outbreak of foot and mouth disease. Why Brazil should give something substantial like this and get nothing in return shows how pathetic this government´s foreign policy is. Officials said the beef ban would certainly be lifted but, if so, why was this not announced officially while Putin was here? Putin did voice support for Brazil being a candidate for a permanent seat on the United Nations Security Council but so what? Practically every visiting leader says the same when they are here. When the UN eventually gets round to its long-awaited reforms we´ll see which countries, especially the existing permanent members, match their words with deeds.   

The Putin visit was a low-key affair, during which he signed some technological agreements, and was barely noticed. The Russian embassy refused to divulge Putin´s schedule in Rio de Janeiro, showing that the secretiveness of the Communist era is still around. Maybe we should be glad that his visit achieved so little. Having an ally like Putin is not in Brazil´s interest. He is no democrat, as has been shown by the way he has locked up opponents and has supported the Ukrainian election result although outside observers said the poll had been rigged. He also sacrificed the lives of hundreds of children in the recent school siege to show who was boss.

Lula has shown that he is easy meat for the Russians and the Chinese. During a recent visit by the Chinese president, Hu Jintao, Lula made a great concession by recognizing China as a “market economy”. By doing so, Brazil gave up its right, under international trade regulations, to impose anti-dumping barriers on Chinese goods which are sold at less than the cost of production due to government intervention.

It really is time Lula started to get his foreign policy sorted out. At the moment, it is negative, backward-looking and taking the country nowhere.

November 11, 2004

(c) John Fitzpatrick 2004